Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. Cardinal Company is considering a five-year project that would require a $2,945,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each of five years as follows: Sales Variable expenses Contribution margin Fixed expenses: $2,873,000 1,019,000 1,854,000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation $754,000 589,000 Total fixed expenses Net operating income 1,343,000 $ 511,000 Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factor(s) using table.

Explanation / Answer

CALCULATION OF THE CASH FLOW FROM THE PROJECT PER YEAR Net operating income = $           5,11,000.00 Add: Depreciation $           5,89,000.00 Total $         11,00,000.00 CACULATION OF PRESTN VALUE OF THE INVESTMENT Period Particulars Amount PVF @ 18% Present Value 0 Outflow $   -29,45,000.00 $                     1.0000 $       -29,45,000.00 1 Inflow $    11,00,000.00 $                     0.8475 $           9,32,203.39 2 Inflow $    11,00,000.00 $                     0.7182 $           7,90,002.87 3 Inflow $    11,00,000.00 $                     0.6086 $           6,69,493.96 4 Inflow $    11,00,000.00 $                     0.5158 $           5,67,367.76 5 Inflow $    11,00,000.00 $                     0.4371 $           4,80,820.14 Total $           4,94,888.12 CACULATION OF PROFITABILITY INDEX Profitability Index = 1 + Net present Value / Initial investment Profitability Index =          1 + $       4,94,888.12 "/" By $         29,45,000.00 Profitability Index =          1 +                         0.17 Profitability Index =                                   1.17 CALCULATION OF THE PAYBACK PERIOD OF THE PROJECT Period Particulars Inflow (Outflow) Cumulative Value 0 Outflow $   -29,45,000.00 $       -29,45,000.00 1 Inflow $    11,00,000.00 $       -18,45,000.00 2 Inflow $    11,00,000.00 $         -7,45,000.00 3 Inflow $    11,00,000.00 $           3,55,000.00 4 Inflow $    11,00,000.00 $         14,55,000.00 5 Inflow $    11,00,000.00 $         25,55,000.00 Total All the investment is recovered in the year 4 but not all the whole year is required for this So the we have to calculate the fraction as below, Payback Period = 2 Years +                  7,45,000.0 "/" By $ 11,00,000.00 Payback Period = 2 Years + 0.68 Payback Period = 2.68 Years Answer =Pay back period = 2.68 Years CALCULATION OF THE SIMPLE RATE OF RETURN Simple rate of return = Net income / Investment Amount Simple rate of return = $ 511,000 / $ 2,945,000 Simple rate of return =                     0.1735 Simple rate of return = 17.35%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.